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The Case of H.P.’s Obstinate Director

When Hewlett-Packard announced earlier this month that two directors were resigning and that Raymond Lane was giving up his title of chairman, the company portrayed the moves as selfless and purely voluntary.

Would that it were so easy.

“Each one of our directors considered the results of our recent shareholder meeting and made the personal decision to do what they felt was best for H.P.,” the company’s new interim chairman, Ralph Whitworth, said. “Today’s announcement is a testament to our chairman’s and departing board members’ statesmanship and sterling professional standards.”

But to the dismay of some directors and shareholders, when it came to Mr. Lane, it took the combined efforts of the company’s chief executive, Meg Whitman, other board members and Dodge & Cox, the mutual fund company that is H.P.’s largest shareholder, to get Mr. Lane to give up the chairman’s title, people with knowledge of the board’s deliberations said. Even then, Mr. Lane refused to leave the board entirely, and other directors were unwilling to force the issue.

H.P. is hardly alone when it comes to the delicate issue of resignations by board members. Even in the rare instances when shareholders vote against proposed directors, it can be difficult to persuade one to resign. And if they don’t, the only way a board can remove them is by not nominating them at the next election. “It’s a huge issue,” said Anne Simpson, director of corporate governance for the California Public Employees’ Retirement System, the giant California state pension fund. Calpers voted against Mr. Lane and several other H.P. directors.

After a tumultuous few years in which H.P.’s board hired and then fired a new chief executive, acquired the software maker Autonomy for $11.1 billion and then wrote off most of the investment, and watched its stock price plunge more than 50 percent, some major shareholders and proxy advisory services recommended shareholders withhold their votes for several directors. Although all the directors were re-elected, Mr. Lane and two other directors, John Hammergren and G. Kennedy Thompson, received less than 60 percent of the vote, which by the standards of shareholder democracy is considered a repudiation.

When the board met to consider how to respond, Mr. Hammergren and Mr. Thompson readily agreed to step down, according to several people knowledgeable about the deliberations. They said Mr. Hammergren had wanted to resign even before the election, but was persuaded to run because of the difficulty at the time of finding a new candidate given the much-publicized turmoil at the company.

But Mr. Lane was another matter. Dodge & Cox voted its shares against Mr. Lane, which is considered especially significant because the San Francisco-based company almost never votes against management recommendations. According to disclosure forms covering the period from January 2009 through June 2012, Dodge & Cox supported management’s recommendations on directors 100 percent of the time. Dodge & Cox executives met with Mr. Lane to explain the firm’s reasoning.

Photo

Raymond Lane is giving up his title as chairman of Hewlett-Packard.Credit
Robert Galbraith/Reuters

Asked for comment, Charles Pohl, co-president and chief investment officer at Dodge & Cox, responded, “Dodge & Cox addresses corporate governance in many ways, from discussions with management to at times withholding votes for directors.”

Mr. Lane also met privately with Ms. Whitman.

Mr. Lane told me this week that he listened to what Dodge & Cox had to say, but that the only message he heard was that the board wanted him to stay, and that any notion he had to be pressured is “fiction.” He continued: “I didn’t feel any pressure at all other than the pressure of the vote. If you get less than an 80 percent vote, it’s something you have to think about. I told the board I’d leave any time they wanted and they said, ‘No, please don’t leave.’ I stepped down as chairman because I thought it was the right thing to do.”

Charles Elson, a professor of law at the University of Delaware and an expert on corporate governance, questioned Mr. Lane’s continued membership on the board. “If it’s true that other directors and shareholders want you to depart, and you don’t, it’s very difficult to do your job effectively. You’ve become a lightning rod. Your presence may be detracting from the company. Why would you want to stay?”

While some participants in the process at H.P. cited pride, prestige, ego and influence in the tight-knit culture of Silicon Valley, Mr. Lane said he stayed only because he thought his continued presence would benefit shareholders. “I’m not doing it for the money. I’d rather not have all the headaches.”

In stepping down, Mr. Lane gave up 30,000 restricted stock units and options to buy 800,000 H.P. shares at $23.59 a share. When Mr. Lane, a former president of the Oracle Corporation, agreed to become H.P.’s executive chairman in September 2011, he received an equity agreement granting the options, but the grant fully vested only if he remained chairman through at least the third anniversary of his appointment in 2014 and H.P. met certain stock price hurdles. So far, the value he has received from these awards is 15,000 shares of restricted stock, worth about $300,000. With H.P.’s shares under $20 this week, all the options are worth less than the strike price. Since he’s staying as a director, he will keep options on only 200,000 shares, which could become valuable if H.P.’s shares rise above the $23.59 exercise price, according to the company’s public filings.

Still, when I mentioned Mr. Lane’s retainer to William Patterson, who started the shareholders’ battle against Mr. Lane and other H.P. directors as executive director of CtW Investment Group, which advises pension funds and unions, he said he found it “troubling and appalling.” He said it created a glaring conflict between what’s best for the company and what’s in the financial interest of a director.

“It just shows that we still have to finish the work we started,” he said, adding that Mr. Lane “should resign.”

Experts say that H.P. is not the first company to fail to persuade a director to step down. Indeed, the real surprise may be that the company’s board moved so quickly and publicly to acknowledge shareholders’ views and take action. “H.P. moved very swiftly, to their credit,” Mr. Patterson said. “It was a matter of days, not months.” Michael Garland, an expert on corporate governance in the office of the New York City Comptroller John Liu, added: “I’m surprised that even the Lane half-step happened so quickly. I would have predicted it would have been announced on a quiet weekend in the summer so it wouldn’t look like a reaction to the vote.”

H.P., under the relatively new leadership of Ms. Whitman and Mr. Whitworth — who is known as an activist shareholder whose company, Relational Investors, owns a large stake in H.P. — is rapidly emerging as a champion of good governance. And if even H.P.’s board couldn’t get a stubborn director to resign, who could?

“No one wants to embarrass someone,” Mr. Elson said. “It’s hard when someone is in front of you to take an adversary position. It takes a lot of courage and is very unpleasant.”

Added Ms. Simpson of Calpers: “It turns into corporate group therapy. They go through this Kabuki where everyone knows change is needed, but no one can have their feelings hurt.”

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Some companies have tried to remove any stigma by imposing term limits or mandatory retirement ages that apply to all directors. Such measures are “a blunt instrument, but it solves a real problem,” Mr. Garland said. “It’s just too uncomfortable for directors to get someone to resign, absent some catalyzing event. Directors are loath to remove their fellow directors.”

But even then, boards may simply ignore their own written policies, just as they often ignore shareholder votes. Occidental Petroleum instituted a mandatory retirement age of 72 for officers and directors, then raised it to 75. But when someone the board wanted to retain turned 75, it voted to waive the policy, or simply ignored it. This prompted a protest from the California State Teachers’ Retirement System, which complained in a letter to the board that it had waived the retirement age for two directors and the board chairman in 2010 alone and “now simply ignores the policy.” Remarkably, Ray R. Irani, executive chairman and former chief executive of Occidental, has been a director for nearly 30 years and is 78. (The company, though, has reached an agreement with Calstrs and some other shareholders promising to enforce the mandatory retirement age for directors beginning in 2015.) An Occidental spokesman didn’t have any comment.

Routinely waiving a retirement age is “entirely inappropriate,” Mr. Elson said. “There may be occasional reasons to waive a retirement age, maybe for a year or two at the most, but no one is irreplaceable.”

At Sirius XM Radio, one director, Leon Black, the billionaire founder of the private equity firm Apollo Capital Management, stayed on the company’s board despite being repudiated by a majority of shareholders in not one but two different elections. The Wall Street Journal reported that he didn’t participate in any board meetings over a three-year span, even by phone. At the time Sirius said that Mr. Black played a positive role on the board and had sometimes sent a “colleague” to report back for him.

“That would seem to be a textbook breach of a director’s duty of care,” Mr. Elson said.

It’s hard to fathom why, in such circumstances, Mr. Black would want to stay on the board. He left only in January, when Liberty Media gained control and announced that it had accepted the “resignations” of Mr. Black and two other directors, who were replaced with directors chosen by Liberty. Even then, Liberty felt obliged to say that the resignations “were not the result of any disagreement with us.”

Spokesmen for Sirius and Mr. Black declined to comment.

Boards “are like the Hotel California,” Mr. Patterson said. “Directors check in but they never check out. It’s so hard to mount and win a campaign, and even then, they stay. Shareholders need to mobilize for a second round. Our work is far from complete.”

A version of this article appears in print on April 20, 2013, on Page B1 of the New York edition with the headline: The Case Of H.P.’s Obstinate Director. Order Reprints|Today's Paper|Subscribe